Ken Kam's Best Ideas Blog

Drugs must be delivered to the right place at the right time to be effective. Elan has two kinds of drug delivery technology that it licenses to other companies for use on their products; sustained release, and NanoCrystal. The Company generates manufacturing revenues and royalties from products sold by other companies that incorporate these technologies. For the first 9 months of 2005, this business generated $149 million of revenue -- up 64% over the same period last year.

Historically, drug delivery technology was something drug companies considered only when their patents were about to run out. Drug delivery technology gives the original developer of a drug a way to set their products apart from the inevitable generic competition. For example, a company with a drug that must be taken multiple times a day could use Elan’s sustained release technology to produce a version that could be taken just once a day. The new sustained release version would itself be patentable thus giving the original drug developer a long-term advantage over generic alternatives.

This is particularly interesting right now because the patents on nearly 60% of the pharmaceutical industry’s blockbuster drugs, representing $103 billion in annual sales will expire by 2010 so interest in developing new versions of these drugs is very high. Elan’s major competitor in drug delivery, Alza, was acquired by Johnson & Johnson (nyse: JNJ) in 2001 for $10.5 billion. Elan’s drug delivery business could be in a very strong negotiating position with all the other companies whose drugs are coming off patent in the next few years. This opportunity could be huge -- even bigger than Tysabri.

Sustained Release Technology

The drug delivery technology that J&J obtained by acquiring Alza is very similar to Elan’s sustained release technology. It is basically a way to coat a pill with an inert layer that dissolves at a predictable rate. By varying the thickness of the inert layer, you can change how long it takes for the layer to dissolve and release the drug beneath it. By alternating layers of inert material and drug, it is possible for example to make a pill that releases a precise amount of the drug every hour for the next 24 hours. The generic alternative would require the patient to take 1 pill each hour for 24 hours. If you don’t want to wake up every hour to take a pill, you’re going to want the sustained release version of the drug. Your doctor will also prefer to prescribe the sustained release version because it will be more likely that you’ll take one pill a day rather than 24. With all drugs, if you miss taking the pill -- for any reason -- it won’t help you.

Convenience is the big benefit of sustained release technology for the patient, and improved patient compliance is the big reason for the doctor to prescribe it over a generic alternative.

NanoCrystal Technology

Elan’s NanoCrystal technology to create nano-sized particles of drugs without changing their chemical properties was actually developed by Kodak and is based on a simple idea. Smaller particles = more surface area = more chemical reactions = better bioavailability. More of the drug is actually used by the body and less is available to cause side effects. To see how this works, think of how long it takes for a piece of rock candy to dissolve in water. The same quantity in table sugar form dissolves much faster because the particles are smaller. If you took the same quantity and pulverized it into nano-sized sugar particles they would almost instantly dissolve. Elan acquired the technology from Kodak in 1998 for $150 million; but then tried to sell the business in 2002 when Elan was trying to reduce its debt. Fortunately, they were not successful because this technology is a hidden gem. I think there is a huge opportunity for Elan’s NanoCrystal technology to improve the safety and efficacy of a wide range of new and existing drugs. Alza never had anything like this.

So far, Elan has used this technology to partner with major drug companies to improve their partner’s existing drugs. Elan typically earns royalties in the 5% - 8% range on these deals. But I think Elan should be able to do much better. All that the partner brings to the table is a blockbuster drug with a soon to be expired patent. Elan brings the technology to create an improved drug with renewed patent protection that can compete well against other generic versions for years to come. Why should Elan settle for 5% - 8% of revenues? What’s to stop Elan from using this technology to come out with their own generic versions of these blockbuster drugs after they go off-patent? This is a much better way to build a stable of blockbuster drugs. Instead of funding R&D and working on pre-clinical compounds that might take a decade to bring to market IF they prove to be effective Elan could be working on the NanoCrystal versions of blockbuster drugs that will soon be off-patent. These are drugs that have already proven to be a success. And the FDA approval process is streamlined: generic drug manufacturers need only show chemical equivalence. That is much easier to prove than efficacy, helping make this a faster and more certain path to build a big pharmaceutical company.

The Bottom Line: It looks like Elan’s drug delivery technologies gives them the opportunity to license or even own the sustained-release or nano-version of a wide range of blockbuster drugs! If this turns out to be the case, Elan’s drug delivery technologies could return more than a double beyond the impact of Tysabri. We plan to do more collaborative research on this question.